It\u2019s not often you see the U.S. Department of Labor jumping into the legal ring to back plan sponsors, but when they do, you know something bigger is at stake than just one plan participant\u2019s gripe. That\u2019s exactly what happened in Hutchins v. HP, Inc., a case that has become a flashpoint over one of the oldest and most misunderstood practices in defined contribution plans: forfeitures.<\/p>\n
Let\u2019s get the basics out of the way. Forfeitures happen when an employee leaves a company before fully vesting in their employer contributions. Those unvested dollars go back into the plan and, here\u2019s the important part, they can legally be used to either pay administrative expenses or offset future employer contributions. This isn\u2019t a loophole or a gray area. It\u2019s been standard procedure for decades, blessed by the Internal Revenue Code, Treasury regulations, and, yes, even the ERISA statutes themselves.<\/p>\n
But apparently, that\u2019s not enough for the plaintiffs\u2019 bar.<\/p>\n
Paul Hutchins, a participant in HP\u2019s 401(k) plan, filed a lawsuit claiming that HP\u2019s use of forfeited funds to offset its matching contributions somehow violated ERISA\u2019s fiduciary duties. Never mind that this practice is disclosed in plan documents, permitted by law, and used across the industry. His theory? That these forfeited funds should have been used to pay administrative fees instead.<\/p>\n
The district court in Northern California tossed the case. Rightfully so. But Hutchins appealed, and now the case sits in front of the Ninth Circuit, dragging along with it a parade of copycat class actions aimed at blowing up a half-century of settled law.<\/p>\n
Enter the DOL.<\/p>\n
In a rare show of unified defense, the Department of Labor, alongside ERIC and other trade groups\u2014filed an amicus brief not just urging the Ninth Circuit to uphold the lower court\u2019s ruling, but warning of the tidal wave of chaos that could follow if it doesn\u2019t. And they didn\u2019t mince words: \u201cThe Plaintiffs\u2019 bar cannot get what it wants from Congress, and it cannot get what it wants from the executive agencies, so it has invited the judicial branch to rewrite a half century of settled law relating to forfeitures.\u201d<\/p>\n
That\u2019s not legalese. That\u2019s a shot across the bow, and one that had to be fired.<\/p>\n
Because if Hutchins wins, every plan sponsor in America suddenly finds themselves on shaky ground. Legal costs skyrocket. Plan costs go up. Forfeiture strategies that were once routine become landmines. And who pays for all that? Participants. Not in theory. In practice. In real dollars that should have gone toward improving plans, reducing fees, or adding benefits.<\/p>\n
This case isn\u2019t about protecting participants. It\u2019s about opening the litigation floodgates. It\u2019s about trial lawyers trying to convert standard, lawful plan practices into new revenue streams under the guise of fiduciary breach.<\/p>\n
And let\u2019s not forget, these forfeiture practices are disclosed. They\u2019re in the plan documents. They\u2019re reviewed by recordkeepers and ERISA counsel. They\u2019re audited annually. If that\u2019s not enough to insulate plan sponsors from liability, then we\u2019ve crossed into dangerous territory where any fiduciary decision can be second-guessed by hindsight and headline-chasing lawsuits.<\/p>\n
The DOL gets this. That\u2019s why they\u2019re taking a firm stance: using forfeitures to offset employer contributions is not a breach of fiduciary duty, it\u2019s a longstanding, permissible practice. And one that, when properly executed and documented, benefits the plan and its participants.<\/p>\n
The final paragraph of the DOL\u2019s brief says it best: \u201cThe Secretary has a substantial interest in fostering established standards of conduct for fiduciaries by clarifying the Secretary\u2019s view that a fiduciary\u2019s use of forfeited employer contributions in the manner alleged in this case, without more, would not violate ERISA.\u201d<\/p>\n
Translation? Let\u2019s not turn every routine administrative decision into a litigation trigger. Let\u2019s not scare plan sponsors out of offering robust retirement benefits. And let\u2019s not let lawyers rewrite the rules just because they don\u2019t like how Congress or the IRS did their job.<\/p>\n
The Ninth Circuit has an opportunity here, not just to decide a case, but to restore some sanity to the retirement plan landscape. Here\u2019s hoping they do the right thing. Because ERISA\u2019s not perfect, but it doesn\u2019t need a rewrite from a courtroom. It just needs to be followed as written.<\/p>\n
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